Tag Archives: Joseph Stiglitz

Measuring Up

I’ve become increasingly fascinated by our human obsession with measurement, and the ways in which measuring something affects–and often distorts–our ability to understand it.

There’s polling, of course, for the political among us. Despite the admonitions of the pollsters themselves, we far too often see the “snapshots” they provide– not to mention the selected populations they quiz and the often-ambiguous questions they ask–as descriptive of the whole of America’s electorate and thus predictive of the future.

In education, legislators have embraced subject-matter testing without considering the way it distorts what happens in the classroom. Subjects that will be tested get extra time and attention; subjects that are of equal (or often superior) importance, like civics, get short shrift because they aren’t tested. (And don’t get me started on the mistaken belief that students’ test rresults measure teacher competence…)

Scientists know that the very act of testing something  can change the results. Scholars also remind us that drawing unwarranted conclusions from what we have chosen to test can lead us astray. Which brings me to a Guardian column by Joseph Stiglitz, one of my favorite economists.

The world is facing three existential crises: a climate crisis, an inequality crisis and a crisis in democracy. Will we be able to prosper within our planetary boundaries? Can a modern economy deliver shared prosperity? And can democracies thrive if our economies fail to deliver shared prosperity? These are critical questions, yet the accepted ways by which we measure economic performance give absolutely no hint that we might be facing a problem. Each of these crises has reinforced the fact that we need better tools to assess economic performance and social progress.

Stiglitz proceeds to point out problems with relying on GDP–long the standard measure of economic performance–to measure a country’s economic performance. (GDP is the sum of the value of goods and services produced within a country over a given period.)

As Stiglitz notes, GDP metrics don’t fully reflect impacts of things like Europe’s austerity measures on long-term standards of living.

Nor do our standard GDP measures provide us with the guidance we need to address the inequality crisis. So what if GDP goes up, if most citizens are worse off? In the first three years of the so-called recovery from the financial crisis, about 91% of the gains went to the top 1%. No wonder that many people doubted the claims of politicians who were then saying the economy was well on the way to a robust recovery.

For a long time I have been concerned with this problem – the gap between what our metrics show and what they need to show. During the Clinton administration, when I served as a member and then chairman of the Council of Economic Advisers, I grew increasingly worried about how our main economic measures failed to take into account environmental degradation and resource depletion. If our economy seems to be growing but that growth is not sustainable because we are destroying the environment and using up scarce natural resources, our statistics should warn us. But because GDP didn’t include resource depletion and environmental degradation, we typically get an excessively rosy picture.

In other words, Stiglitz is telling us that there is something fundamentally wrong with how we measure economic performance and social progress.

Getting the measure right – or at least a lot better – is crucially important, especially in our metrics- and performance-oriented society. If we measure the wrong thing, we will do the wrong thing. If our measures tell us everything is fine when it really isn’t, we will be complacent.

A recent article in Time suggests that other nations are coming around to Stiglitz’ view.

New Zealand became the first nation to formally drop gross domestic product (GDP) as its main measure of economic success. The government of Prime Minister Jacinda Ardern said the budget would aim not at maximizing GDP but instead at maximizing well-being.

Apart from schools, hospitals and roads, whose budgets would be allocated in the normal way, resources would be distributed according to their impact on five government priorities: mental health, child well-being, the inequalities of indigenous people, building a nation adapted to the digital age and fashioning a low-emission economy.

Shades of Bhutan’s “Gross National Happiness” index!

Stiglitz says it is now possible to construct much more accurate measures of an economy’s health.. I think it is fair to say that we should adopt those measures–but only after we subject them to a rigorous analysis to assure ourselves that the elements being measured are the ones that should be measured, the ones that will give us a more accurate understanding of ecological and economic (and inevitably social and political) reality.

What we choose to measure will tell us what we really value.

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What Teddy Roosevelt Understood That We Don’t

Back when Republicans were responsible stewards of the public good, Teddy Roosevelt waged war on monopolies. He understood that the virtues of capitalism–and they are many–required government protection. American commerce was no longer characterized by small merchants and farmers competing on a more-or-less equal playing field, and that made it imperative to constrain the powerful from dominating the marketplace and squeezing out the little guys.

In a recent column, Nobel prize winning economist Joseph Stiglitz points out that the problem of monopoly power is still with us, and still an enormous impediment to the proper working of a market economy:

In today’s economy, many sectors – telecoms, cable TV, digital branches from social media to Internet search, health insurance, pharmaceuticals, agro-business, and many more – cannot be understood through the lens of competition. In these sectors, what competition exists is oligopolistic, not the “pure” competition depicted in textbooks….

US President Barack Obama’s Council of Economic Advisers, led by Jason Furman, has attempted to tally the extent of the increase in market concentration and some of its implications. In most industries, according to the CEA, standard metrics show large – and in some cases, dramatic – increases in market concentration. The top ten banks’ share of the deposit market, for example, increased from about 20% to 50% in just 30 years, from 1980 to 2010.

Some of the increase in market power is the result of changes in technology and economic structure: consider network economies and the growth of locally provided service-sector industries. Some is because firms – Microsoft and drug companies are good examples – have learned better how to erect and maintain entry barriers, often assisted by conservative political forces that justify lax anti-trust enforcement and the failure to limit market power on the grounds that markets are “naturally” competitive. And some of it reflects the naked abuse and leveraging of market power through the political process: Large banks, for example, lobbied the US Congress to amend or repeal legislation separating commercial banking from other areas of finance.

Bottom line lesson: government should be an “umpire,” ensuring a level playing field, rather than a member of the “team” that has most effectively used its greater resources to game the system and co-opt the process.

As Stiglitz notes, unequal distribution of power in the marketplace drives inequality and undermines democratic institutions. It’s hard to disagree with his conclusion:

If markets are fundamentally efficient and fair, there is little that even the best of governments could do to improve matters. But if markets are based on exploitation, the rationale for laissez-faire disappears. Indeed, in that case, the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity.

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